Question 1

**Section A**

The current spot exchange rate between the Euro (EUR) and the Brazilian Real (BRL) is EUR 1 = BRL 5.50. 
Annual inflation is expected to be 2% in the Eurozone and 8% in Brazil.

According to Purchasing Power Parity (PPP), what is the expected spot rate in one year? (Round to two decimal places).

Accepted Answer

Use the PPP formula: S1 = S0 * [(1 + hc) / (1 + hb)], where hc is inflation in the counter currency (BRL) and hb is inflation in the base currency (EUR).

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Putting the base currency inflation in the numerator, which results in the wrong direction of currency movement.

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FM — Financial Management Practice Exam 1

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